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Surety Did Not Make ‘Gift’ to Borrower

Deborah Elkins//April 25, 2017

Surety Did Not Make ‘Gift’ to Borrower

Deborah Elkins//April 25, 2017//

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Appellant, who deposited a $50,000 certificate of deposit with a bank as collateral for a guaranty to assist his former romantic partner in obtaining a loan for her business, did not make a gift to the former partner; the Supreme Court of Virginia reverses a circuit court holding that appellant, as an accommodation guarantor of a promissory note, was not entitled to judgment against the maker of the note under Va. Code § 49-27 upon default by the maker and seizure of collateral by the lender.

Gratuitous surety

An accommodation or gratuitous surety is someone who assumes secondary liability on an obligation for the benefit of the principal rather than for their own profit. In Virginia, the accommodation surety has always been one of the favorites of the law. Compensated or not, however, it is elementary that one secondarily liable on an obligation who  has satisfied the demands of the holder is entitled to reimbursement from the party primarily liable.

On appeal, debtor argues that Code § 49-27 does not apply because the surety executed the guaranty as a gift. Debtor contends the circuit court finding that the surety executed the guaranty “to help out” his former romantic partner precludes him from exercising any right to reimbursement under Code § 49-27. We do not agree. On the contrary, the right to reimbursement is expressly available to any person liable as a guarantor.

The guarantor testified that he put the CD on deposit with the bank to help debtor gain loan approval, but the CD was not itself a “gift.” To the extent the facts demonstrate any gift at all, that gift was the surety’s decision to act as an accommodation surety rather than a compensated surety. The surety merely made it possible for debtor to gain loan approval by putting the CD on deposit as collateral.

Neither the surety nor his former romantic partner agreed not to seek reimbursement if the CD was drawn down by the bank. The record does not contain any evidence that the surety waived his rights under Code § 49-27. The undisputed evidence instead demonstrates that the surety assumed secondary liability as a guarantor of the note and that the bank withdrew funds from the CD to partially satisfy the note. Taken together, these facts triggered the surety’s right to reimbursement for the amount paid, with interest from the time of payment, and five percent damages on such amount.

Because there is no evidence in the record that the surety made a gift of the CD or waived his statutory rights under Code § 49-27, he is entitled to judgment.
Reversed and remanded for a determination of the amount due to the surety under Code § 49-27.

Chamberlain v. Marshall Auto & Truck Center Inc. (Lemons) No. 160349, April 13, 2017; Fauquier County Cir.Ct. (Whisenant) Glenn W. Pulley, Monica T. Monday, Amanda M. Morgan for appellant; Robin C. Gulick, T. Huntley Thorpe  for appellee. VLW 017-6-024, 6 pp.

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